How OPEC tried, but failed, to kill the Bakken

When OPEC ramped up its production in 2014 to drive down world oil prices, it was engaged in a strategy to put North Dakota’s Bakken shale play out of business, according to Daniel Fine, Ph.D., associate director of the New Mexico Center for Energy Policy.

“The downturn was a flush of flat-out production, and the target was the Bakken,” he said. “The Saudis understand the Bakken. They read everything. The most important consultants to OPEC are based in Houston—they’re Americans.”

Fine, a former MIT professor who’s also the energy policy project leader for the New Mexico State Department of Energy Minerals and Natural Resources, spoke during the opening day of the Bakken Conference & Expo July 17-19 in Bismarck, North Dakota.

He was jointed on the panel by John Yates, president and founder of Abo Empire, to discuss New Mexico’s San Juan and Delaware basins. While Yates covered the economic impact of the basins on New Mexico, Fine explained why their futures are headed in opposite directions, as well as OPEC’s impact on world oil prices.

Fine noted that at one time, the San Juan Basin was No. 2 in U.S. gas production. In recent days, low gas prices have resulted in Conoco, Chevron and WPX announcing plans to sell their interests in the basin. This year, for the first time, the Delaware Basin in southern New Mexico will eclipse the San Juan Basin in gas production.

“What is the future of the San Juan Basin? The future is that in the last 60 to 70 years, only about half of the gas has been recovered, leaving 32 trillion cubic feet of gas,” Fine said.

Turning to the subject of world oil prices, Fine discussed his experience of studying OPEC since the 1970s and what he’s learned from it. For example, in 2014 when OPEC increased its production specifically to target the Bakken and other U.S. shale plays, Fine forecast that prices would fall to $28 to $23 a barrel while others expected them to rebound to $100 a barrel.

“The Saudi mind is not the Bakken,” he said. “The operators here go for very short-term results. Their balance sheet is quarter-to-quarter. Saudi Aramco and the OPEC producers are taught to think in five-year ranges. So I picked the five-year range in 2000 to 2003 and said this might be it. It was $23 to $28.”

However, Fine said OPEC misjudged the resilience of American shale producers.

“The Saudis underestimated the American capacity to resist, to take lower prices without shutting down and essentially abandoning the business,” he explained. “It didn’t happen. Halliburton backed off and the service companies took less. And then the technology came about. WPX in the San Juan Basin reduced its drilling time per well from 27 days to three and a half. The laterals expanded and multi-well operations occurred.”

Despite this success, Fine cautions U.S. producers about becoming overly optimistic because they’re seeing an increase in oil exports.

“It’s a gift, and it’s temporary,” he stressed.” It will disappear when OPEC gets back to its traditional form and it can compete against the Bakken and against the Permian.”

So where’s the price of oil going? Fine forecasts that for 2017 and through the current OPEC production cuts—which run until April 2018—prices will range from $52 a barrel on the high side to $38 a barrel on the low side.

“I see essentially a very skeptical outlook on the price of oil,” Fine noted. “We’re going to go over 10 billion barrels of oil at lower prices. No one expected this. The cost of lifting oil is down. Some companies with prolific wells can take $40 oil and get a 10 percent rate of return—unheard of in the Middle East—but it’s happening.”